I have been saying for a long time that all of the legal protections in the world cannot help creditors if there is not money there to pay them. (I provided an overview of creditors’ legal protections here, and agree that the general obligation bondholders have the strongest legal protections outside of the passage of federal restructuring legislation.) Puerto Rico could potentially honor its payments in the next couple months, but the commonwealth has precious little ability to continue to service its debts over the short-term.
The problem with all of these discussions is that they center on Puerto Rico’s bonded indebtedness and treat Puerto Rico’s troubled pension system as an irrelevant footnote. Even Treasury and the NY Fed do this in their analyses of Puerto Rico’s finances. Perhaps this is to be expected on some level, because the municipal market has never seen a pension fund in a truly nuclear situation, as is the case with Puerto Rico.
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If you are realistic about Puerto Rico’s ability to make required contributions to the fund and the quality of its remaining holdings, the time frame for the pension system to reach insolvency is probably accelerated.
So, in the short term, Puerto Rico’s core long-term financial commitments (assuming they are to be honored) are expected to consume over half of the commonwealth’s available revenues. Even if you strip out everything but guaranteed debt, this still amounts to somewhere in the neighborhood of 40% of the commonwealth’s general fund.
Those are funds that are being diverted that cannot be applied to the actual business of government. No government could continue to function after losing funds of that magnitude. Creditors are not betting that AGP lacks their fortitude — they are betting that the court system will agree with them that this fiscal outcome is appropriate. If I were them, I would start considering the legal powers governments give themselves in extremis. Because absent federal intervention, that’s what they likely will be up against.
People can talk about the government’s bloated payroll, vacation days, and whatever other financial outrage they want to hold up as An Alternative Reason for Puerto Rico’s Fiscal Crisis — many of which are legitimate complaints, if minor in the grand scheme of things — all they want. However, it is not possible for Puerto Rico to adopt austerity measures that will offset what it has borrowed.

One of Puerto Rico's top bankers today told the Senate Judiciary Committee that a full-blown financial collapse in the commonwealth could be especially hard on the sick and the elderly.

Richard Carrión, executive chairman of Banco Popular, testified at a hearing organized by the Senate Judiciary Committee that the commonwealth's current debt problems are the result of years of fiscal mismanagement and of government policies that have held back economic growth.

But, because so many people in Puerto Rico are poor, and the average age is high, the effects of a default would be especially painful, Carrión said.

Puerto Rico has a population of about 3.6 million people, according to the Census Bureau.

"Approximately 600,000 Puerto Ricans could lose their health care coverage when Medicaid funds run out," Carrión said.
....
"Once the funds are depleted, which is expected to happen soon, the central government will have to divert resources normally used to provide essential services to pay pension benefits," Carrión said. "For most retired government employees, including teachers, their government pension is their sole source of income, and failure to receive that income would result in a true humanitarian crisis."

Carrión says he believes policymakers should address Puerto Rico's problems by creating a legal framework to restructure the commonwealth's debt; setting up an effective fiscal oversight and control mechanism; and adding economic stimulus measures to encourage new investment and increase employment.

Debt-racked Puerto Rico looks all but certain to miss a second repayment deadline on Tuesday – a move that is likely to worsen the financial crisis in the US territory and turn up the political heat on a Caribbean island that has been dubbed “America’s Greece”.

Puerto Rico’s government development bank is due to make a $354m payment to bondholders on 1 December but is unlikely to be able to pay. Puerto Rico governor Alejandro Garcia Padilla was still negotiating with creditors late Monday.

After defaulting on its $72bn debt for the first time ever in August (the bank missed a $54m payment), barring an all-but-inconceivable reversal of fortunes, the country will also miss a $900m January deadline.

The issue is already a hot button among presidental candidates. Democratic frontrunner Hillary Clinton chastised Congress for inaction, saying bankruptcy – which would require congressional intervention – is the only option. “There is no alternative because the debt is so large and it is impossible to restructure it without the kind of help you get in bankruptcy,” she said in a roundtable event.

Congress Sends Puerto Rico Little Help as Crisis Escalates
Measure would boost payments to hospitals, doctors on island
Bankruptcy, immediate financial help left out of spending bill

U.S. lawmakers agreed to extend some health-care aid to Puerto Rico as part of a $1.1 trillion spending bill that would avert a government shutdown, a step that fell far short of the lifeline the Caribbean island was seeking to rescue it from its escalating debt crisis.
The legislation, which marks Congress’s first step to assist Puerto Rico, failed to include any of the island’s key priorities, opting instead for measures that would increase health funding by about $900 million over a decade and allow the Treasury Department to provide technical assistance. The bill may be the last chance this year for the commonwealth to receive help from the federal government.
The bill doesn’t provide “any meaningful provision to help Puerto Rico address its economic and fiscal challenges,” Pedro Pierluisi, the territory’s non-voting House member, said in a statement. “Leaders in Congress missed a major opportunity to do the right thing.”
Puerto Rico Governor Alejandro Garcia Padilla has been pleading with lawmakers for assistance as it runs out of cash and struggles to pay its $70 billion of debt. The commonwealth this month narrowly averted a default on government-guaranteed debt for the first time, and he said Wednesday that the island may be unable to cover $957 million of interest payments due on Jan. 1.

The money poured in by the millions, then by the hundreds of millions, and finally by the billions. Over weak coffee in a conference room in Midtown Manhattan last year, a half-dozen Puerto Rican officials exhaled: Their cash-starved island had persuaded some of the country’s biggest hedge funds to lend them more than $3 billion to keep the government afloat.

There were plenty of reasons for the hedge funds to like the deal: They would be earning, in effect, a 20 percent return. And under the island’s Constitution, Puerto Rico was required to pay back its debt before almost any other bills, whether for retirees’ health care or teachers’ salaries.

But within months, Puerto Rico was saying it had run out of money, and the relationship between the impoverished United States territory and its unlikely saviors fell apart, setting up an extraordinary political and financial fight over Puerto Rico’s future.

On the surface, it is a battle over whether Puerto Rico should be granted bankruptcy protections, putting at risk tens of billions of dollars from investors around the country. But it is also testing the power of an ascendant class of ultrarich Americans to steer the fate of a territory that is home to more than three million fellow citizens.

The investors with a stake in the outcome are some of the wealthiest people in America. Many of them have also taken on an outsize role in financing political campaigns in the aftermath of the Supreme Court’s 2010 Citizens United decision. They have put millions of dollars behind candidates of both parties, including Hillary Clinton and Jeb Bush. Some belong to a small circle of 158 families that provided half of the early money for the 2016 presidential race.

To block proposals that would put their investments at risk, a coalition of hedge funds and financial firms has hired dozens of lobbyists, forged alliances with Tea Party activists and recruited so-called AstroTurf groups on the island to make their case. This approach — aggressive legal maneuvering, lobbying and the deployment of prodigious wealth — has proved successful overseas, in countries like Argentina and Greece, yielding billions in profit amid economic collapse.

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Others fear a different precedent: A handful of wealthy investors, they argue, are trying to rewrite the social contract of an entire United States territory. Puerto Rican officials say they have already cut public services and slashed central government spending by a fifth to keep ahead of payments to the hedge funds and financiers.

“What they are doing, by getting all the resources for themselves, is undermining the viability of Puerto Rico as a commonwealth,” said Joseph E. Stiglitz, the Nobel Prize-winning economist. “They want their money now, and they want to get the rules set so that they can make money for the next 20 years.”

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Early this year, with Puerto Rico’s economic outlook darkening, the island’s nonvoting member of the House of Representatives, Pedro R. Pierluisi, made what he thought was a modest proposal.

He introduced a bill that would change federal law to allow Puerto Rico’s struggling municipalities and public corporations, such as the island’s power authority, to declare bankruptcy. It would affect only about a third of the island’s debt, Mr. Pierluisi told Republican colleagues in Congress. It would also give Puerto Rico the same right as most states and leverage against creditors — so-called Chapter 9 bankruptcy protection. And it would cost taxpayers nothing.

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But opponents were organizing against the measure, led by firms that owned debt from Puerto Rico’s power authority, according to federal lobbying records and other documents. Among them were two mutual funds — Oppenheimer Funds and Franklin Templeton — and hedge funds, some specializing in distressed debt: the D.E. Shaw Group and Angelo Gordon, along with Marathon and BlueMountain.

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Puerto Rico could not now gain access to bankruptcy protections that it had not been entitled to when it borrowed the money, the funds argued. And, they suspected, there was still revenue hiding within the island’s opaque books, as well as cuts to be made to its oversize bureaucracy.

In a letter circulated to Republican staff members in February and obtained by The New York Times, representatives for BlueMountain, a $22 billion firm headquartered on New York’s Park Avenue, warned that the bill would put the bondholders at a disadvantage in any fight over Puerto Rico’s debt. Bankruptcy, they said, would inevitably prioritize those with pension claims over the island’s creditors, as had been the case when Detroit declared bankruptcy in 2013.

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A little more than a week later, Mr. Hatch blocked an effort to bring Mr. Pierluisi’s bankruptcy legislation to a vote. He soon offered his own proposal: To respond to the island’s humanitarian needs, Congress would provide $3 billion to Puerto Rico if it submitted to federal financial oversight. It was the approach favored by bondholders. It was also, in effect, a bailout.

Supporters of the bankruptcy bill clung to the hope that congressional leaders would insert a provision in its end-of-year spending bill allowing Puerto Rico to restructure at least some of its debt. But when the bill was unveiled on Tuesday, it contained no such language.

The island remains in negotiations with the financial firms that own its debt. Without the possibility of bankruptcy, its only leverage is the threat of default.

The House speaker, Paul D. Ryan, Republican of Wisconsin, said on Wednesday that lawmakers would try to come up with a solution by the end of March.

A reckoning could come sooner: On Jan. 1, bond payments of $1.4 billion will be due. No one is quite sure if the island can pay.

Public employees owed $120 million in payments as of Dec. 20
Commonwealth owes $957 million in debt payments on New Year's
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Puerto Rico Governor Alejandro Garcia Padilla will likely avoid comparisons to Ebenezer Scrooge by paying Christmas bonuses due to public employees as the commonwealth contemplates defaulting on bond payments at the start of the year.
The 44-year-old governor, who won’t seek re-election when his term expires in January 2017, will begin paying Monday about $120 million that workers were owed as of Dec. 20, according to an announcement posted Sunday on the administration’s website. Jesus Manuel Ortiz, a spokesman for the governor in San Juan, didn’t immediately respond to an e-mail and phone message.
The administration had said it wasn’t sure whether it had enough money to make the bonus payments, which economists say have a multiplier effect on the island’s struggling economy. Garcia Padilla also faces a $957 million interest payment on commonwealth and agency debt due Jan. 1, including $357 million on general-obligations. Puerto Rico’s constitution requires that officials must first pay general-obligation debt before other bills.

A 1969 commonwealth law requires the government to pay its workers a Christmas bonus if they work at least 700 hours that year, according to Jose Alameda, an economist and professor at the University of Puerto Rico at Mayaguez. Instead of implementing a raise at that time, lawmakers established the bonus to increase public-employees’ salaries, according to Sergio Marxuach, public-policy director at the Center for a New Economy, a research group in San Juan.
“I have to do everything in my powers to pay that money,” Garcia Padilla said during a Dec. 9 press conference in Washington . “If I have the funds, I have no option but to pay that money.”
The average salary of a central-government employee is $28,000, with most workers receiving a holiday bonus of about $600, according to Barbara Morgan, a spokeswoman who represents the Government Development Bank at SKDKnickerbocker in New York. The bank oversees the island’s finances and is in talks with bondholders to cut its debt load.

Utility's tentative accord would be the first restructuring
Governor says bankruptcy would avoid costly, `chaotic' talks

Representative Nancy Pelosi, the leader of the House Democrats, took to the chamber’s floor on Friday morning and scorned Congress for not giving Puerto Rico the tools to cut its crippling debt.
Twelve hours earlier in New York, island officials and creditors reached a tentative agreement to begin doing just that.
The accord, if completed by bondholders and insurers, would reduce the $8.2 billion owed by Puerto Rico’s electric utility. It’s just a first step in the island’s struggle to escape from under a $70 billion debt burden, held by more than a dozen agencies -- a task so complex that Puerto Rican officials are lobbying Congress for the power to declare bankruptcy.
While the agreement reached late Thursday took more than a year to negotiate, the process was “relatively smooth because the interests were fairly aligned on both sides,” said Triet Nguyen, a managing director at NewOak Capital, a New York financial-advisory firm. “When you get to the rest of the debt complex it’s a much messier process.”
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‘Costly and Chaotic’
Garcia Padilla said renegotiating the government’s entire debt load would be far more difficult.
“The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic,” he said. “Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner.”
Prepa had been negotiating since August 2014 with hedge funds and mutual funds including OppenheimerFunds Inc., who in November agreed to take losses of 15 percent. On Thursday, Prepa reached a tentative deal that includes bondholders and insurers MBIA Inc. and Assured Guaranty Ltd., which had been holdouts, according to two people with knowledge of the discussions.
The agreement, which hasn’t been finalized, came just two weeks before Prepa is scheduled to make a $196 million interest payment to bondholders. If it misses that payment, creditors could sue the agency to appoint a receiver and take over operations, said Palmer, the BTIG analyst.

In Puerto Rico, the way forward only got murkier in 2015. So Pimco kept its allocation to commonwealth bonds at zero as Gov. Alejandro Garcia Padilla said the island needs to restructure its debts to emerge from a severe fiscal crisis. This month, he said the U.S. territory could default on Jan. 1, when almost $1 billion of interest is due.

It took the Puerto Rico Electric Power Authority more than a year to reach a tentative agreement last week with bondholders and insurers to lower its $8 billion debt, showing how difficult such talks are without the threat of filing for bankruptcy. Getting Chapter 9 extended to the commonwealth hasn't gained traction in Congress. The U.S. Supreme Court in 2016 will rule on the island's Recovery Act, a measure allowing for the Puerto Rico's publicly owned corporations to restructure debt that was struck down in court.

"A key part of our decision to not invest in Puerto Rico up until now is the lack of a clear set of rules to provide Puerto Rico debt relief, which we think is inevitable," Hammer said. "We want to know what the rules are before we're willing to commit investor capital."

The call paid off: Junk-rated Puerto Rico bonds have plunged 13 percent this year, the third worst of all market segments tracked by Barclaysc.

"I'd expect us to remain very cautious on Puerto Rico until we have a set of investable rules," Hammer said. "There will be a lot of noise without a lot of clarity, and that's not good for bond prices."

For starters, Puerto Rico may be able to cover the payment, at least for the roughly $350 million in interest due for the island's general obligation bonds. The opacity of Puerto Rico's finances is a matter of disturbing record, but Padilla's administration is well-versed in the art of budget brinksmanship and knows that holders of G.O. bonds might be among the first to sue in the event of a default.

Padilla also had a more immediate legal obligation to meet, since payment of the Christmas bonuses is mandated by a 1969 law. As he told a press conference in Washington last week, "If I have the funds, I have no option but to pay that money."

And that money will be injected directly back into Puerto Rico's ailing economy, with an estimated overall impact of $150 million. You can't necessarily say that about the interest payments. Big hedge funds now own about one-third of Puerto Rico's $70 billion in debt, more than what is held by commonwealth residents either directly or through mutual funds.

If you're Padilla, and you ask yourself if you'd rather be seen as stiffing government workers or tycoons and their armies of lobbyists, the political if not moral choice is pretty clear.

After all, we're talking about a place where 42 percent of the population lives below the poverty line, more than 12 percent are unemployed (versus about 5 percent on the mainland), and the average weekly wage last year was $505 versus $949 nationwide. Ordinary Puerto Ricans could use a little Christmas cheer.

That said, the 1969 law mandating the Christmas bonus is exactly the kind of thing that Puerto Rico needs to junk. Along with absurd regulations on overtime and severance payments, it forms part of a thicket of labor laws and rigidities that keep the island from becoming more jobs-friendly.

To get rid of it and enact other painful reforms will take a firm nudge from the U.S. Congress, which left for the holidays with only a pledge by Speaker Paul Ryan to consider the plight of the island's 3.5 million U.S. citizens in the New Year. As Santa might say, Ho, ho, ho!